Burke, an energy tycoon, hired the accounting firm of Arthur Young and Company to audit several of his operations. The SEC brought an action against Burke for fraud and for failure to meet certain SEC reporting requirements. The SEC also named Arthur Young as a d e fendant, claiming that the accounting firm should have discovered the fraud. Arthur Young argued that it had followed GAAS when it had audited Burke.

The accounting firm concluded that this strict adherence to GAAS immunized it from liability under securities law. The SEC argued that Arthur Young should have done more to discover the fraud than what was required under GAAS. Was the SEC correct? Explain.

Securities and Exchange Commission v. Arthur Young and Company, 590 F.2d 785 (9th Cir.).